Client relations: Breaking up is hard

Not that long ago, some industry research highlighted how people are more likely to change their friends, or even their spouses, rather than their trusted professional advisers. If that’s true of us as individuals, then put us together as a board of trustees and we can be just as loyal. The relationship between a trustee board and the scheme actuary is usually about as close as it gets, probably because the scheme’s viability hinges on valuation results. A scheme actuary is a personal appointment and so it shouldn’t be a surprise that the relationship is personal.

Often an actuarial firm originally won the scheme’s business on the basis of the experience and personality of the nominated actuary, not just its resources and reputation. An appointment can just as easily be lost because the actuary moves to another firm.

The thought of changing a long-standing relationship can leave trustees feeling vulnerable at the thought of losing sometimes many years’ worth of scheme knowledge — and who can blame them? With mounting responsibilities resting on trustees’ shoulders, many are unwilling to potentially ‘throw the baby out with the bathwater’.

Unfortunately, this often leaves trustees in a position where they have to put up with a less than perfect service, because at least they know the major issues are under control. To try and resolve this conflict, trustees often make their unhappiness known through informal ‘chats’, rather than tackling the problem formally. This often causes frustration, leaves issues unresolved and can lead to the relationship passing the point of no return into a re-tender.

Living record There is another way, of course, but it does require time and attention. There’s no question that proactively managing the relationship is hard work, but it reaps rewards and can ultimately save it. Often dissatisfaction stems from a string of smaller issues rather than one or two show-stoppers.

Annual due diligence reviews and evaluation of the cost/service balance are essential components in formal evaluation, as these yield indisputable truths. The formal process gives trustees a forum for raising concerns in a non-confrontational way, with evidence, records and justification forming the basis of any discussion, rather than the most recent thing to go wrong (or right). For this to work effectively, issues arising throughout the year need to be kept in a ‘living record’. It doesn’t have to be complicated, as long as it lists the details of any problems.

Another step in the annual review is to re-visit the service agreement. It should be up to date and relevant to the scheme – not just a standard document – and should acknowledge the complexity of the scheme. The current structure might be fairly straightforward, but what about historic benefit structures? Have there been any mergers or acquisitions? Are there any members with ‘special’ benefits? Is the administration data up to scratch? Is the scheme contracted out? Has anything changed significantly since the appointment? These factors will all impact on the actuary’s ability to deliver on time and at optimum cost. Other points to look for are detailed in the box below.

Now more than ever, cost control is essential. It’s surprising how many schemes never compare invoice charges against the actual work produced. Empirical evidence suggests that some trustees are becoming less anxious of change and are more willing to switch their actuarial provider – they soon accept it’s not an easy task. Matching an actuarial firm to a board of trustees is like finding a good pair of walking shoes. A comfortable fit for one scheme could be totally wrong for another. The process takes time and it’s not cheap.

So if the trustees are serious about a change, who do they go to for help? Until now, their closest adviser has probably been the scheme actuary (and their firm). There’s probably been a reliance on the firm for more than just straightforward actuarial advice – but this is one occasion where they can’t help. So where do trustees get advice or help? Many actuarial firms have consulting arms that can assist in a re-tender exercise. It has to be said that they also often shortlist their own actuarial practices in the exercise. While this can be a perfectly reasonable step, the question of objectivity has to be raised, so that the decision can be justified.

Outside help Do trustees need outside help at all? Whether trustees manage the process themselves or in association with an external consultant will probably depend on the internal resources available and the size of the scheme. Large schemes may be able to set up a project team to do most of the detailed work and only use external help if it can add value. Mid-sized and smaller schemes may not be able to free up sufficient resource and could be looking for the process to be run externally.

Whichever option, the essential ingredients of a tender process should be the same (see box, right). Actuarial expertise is a key criterion, of course, but during the course of the tender it is also essential to investigate the firms’ IT capability. Actuarial calculations are now almost wholly automated. Even data testing is now checked via computer routines. Greater automation and systems integration means that trustees pay for skill, not paperwork, and reduces the risk of human error. Firms should be able to pick up data, transfer it to the valuation routine and produce a first draft without any re-keying.

Occasionally a trustee board will go through the whole re-tender process, when in reality they want to test the market. Here the trustees’ aim is to ensure the balance between the cost and service received is up to market standard – a straightforward benchmarking exercise. Generally, they have no big issues with their existing actuarial supplier, but want to confirm they’re fulfilling their fiduciary responsibilities. Sometimes trustees simply want their existing supplier to pull their socks up and provide a more effective service.

There’s a practical and psychological difference between putting the actuarial brief out to tender and conducting a market-test exercise. A re-tender is an in-depth process solely designed to facilitate change. When actuarial firms decide whether to respond to a brief, they will be interested in whether it is a serious re-tender. For a large scheme, the time, effort and cost involved in tendering can be substantial – for both the scheme and the firm. It’s so important that trustees spend time at the outset to agree on their motivations and plan accordingly. This will ensure that effort and resources are not wasted.

Every scheme is different in one way or another, but the process for ongoing relationship management and benchmarking is fairly similar – both help to keep trustees in control. The tender process kicks in when trustees decide change is unavoidable and is designed to produce the optimum match between the actuarial firm, trustee board and scheme.

Points to look for in a service agreement>> Statutory reporting requirements and timescales, including whistle-blowing procedure >> Liability relating to trustees and the firm >> Service levels and penalties for non-delivery. Protocol for ad hoc services. Policies for review of actuarial factors >> Appointment and contract duration, including variation and notice periods >> Fee basis — time and charged rate applicable to scheme actuary and the team that will produce the majority of work, and/or core fee for fixed-fee agreements. Plus payment terms and how ‘ordinary’ additional work is charged >> Work review process — peer and/or subordinate >> Complaints/dispute procedure >> Cover arrangements — what happens if the scheme actuary is unavailable, on holiday or leaves the firm?

The tender process 1 Determine motivations, requirements and expectations. List essential and ‘nice-to-have’ competencies. Choose ‘long’ list of approximately eight firms that roughly match the scheme’s characteristics and requirements 2 Draft tender document to reflect and test the required competencies and expectations and assess for cultural and strategic fit 3 Evaluate and score completed tenders, shortlist three or four firms that are a good match. Research proposed scheme actuary 4 Visit shortlisted firms to meet proposed scheme actuary and test tender responses, organisational and IT capabilities, and people issues. Compare results 5 Present findings to trustee board 6 Make a decision – the firms’ costs and capabilities should all now be similar; softer factors like personal fit between the scheme actuary and the board will inform final choice 7 Transfer and implementation.